Skipped Coupon on Indian Bank Bond Underscores Capital Pressures

  • Dhanlaxmi capital adequacy ratio below regulatory requirement
  • First time investors in India forgo interest on bank capital

The deferral of a coupon payment last month by Dhanlaxmi Bank Ltd. that was prompted by an inadequate capital measure flags mounting risks as Indian banks come under pressure, Fitch Ratings said.

Kerala-based Dhanlaxmi had an original July 30 deadline to pay interest on its 275 million ($4.1 million) rupee upper tier 2 bonds, according to company filings. The 10 percent securities have a clause that says that the bank is not liable to pay interest or principal if its capital adequacy ratio falls below regulatory requirements, according to the filings. The central bank last month asked Dhanlaxmi to put off the coupon payment until it can comply with requirements for the ratio in later years, the lender had said.

That was the first time that investors in Indian banks had to forgo interest on a capital instrument, Fitch said. The Reserve Bank of India is pushing lenders to clean up bad debts as they try to meet new capital rules. Fitch predicts the nation’s banks will need to raise at least $90 billion in extra capital by 2019. While the government has already announced plans to inject more into state-owned lenders, privately held banks such as Dhanlaxmi aren’t getting that kind of assistance.

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“Market concerns about bank capital have increased because of the RBI-imposed asset-quality review, which uncovered higher non-performing loans, triggering first-time losses at some banks,” Fitch analysts Saswata Guha and Janine Dow wrote in a report Friday. “This limits banks’ ability to generate new capital internally and makes it more difficult for them to access new sources of capital from the market.”

A call to Dhanlaxmi’s general line was put through to a person who couldn’t immediately comment.

The lender reported on Thursday that its capital adequacy ratio fell to 7.44 percent as of June 30, below the 9.625 percent minimum capital ratio required by the central bank. That will increase to 11.5 percent by the end of March 2019.

The RBI can bar banks from paying the coupon on subordinated debt instruments if their ratios fall below minimum requirements, the Fitch analysts said.

For a story on the boost India’s state-owned banks are getting, click here

Credit Analysis & Research Ltd., an Indian debt assessor, earlier this month cut its rating on Dhanlaxmi’s upper tier 2 bonds to D.

The skipped coupon payment is “a positive development for a system with a high expectation of support for banks and where moral hazard has developed around the assumption that support could be extended to regulatory capital instruments,” the Fitch analysts said.

Bank earnings will likely remain weak for at least another 12 to 18 months, they said.

“Capital ratios will continue to show signs of strain over the short to medium term, and banks will remain under pressure to raise additional funds,” the Fitch analysts wrote. “Until they do, risks for creditors will remain high.”

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